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Q4. Suppose the test of APT is based on the K-factor model. The K factors are the following: growth in industrial production (MP). change in
Q4. Suppose the test of APT is based on the K-factor model. The K factors are the following: growth in industrial production (MP). change in expected inflation (DEI). unexpected inflation (UI). unexpected changes in risk premiums (UPR). unexpected changes in term structure slope (UTS). Equally-weighted (EWI) and value-weighted (VWI) market indexes. Fama-MacBeth's two-stage estimation technique produces the following slope coefficients with t-statistics in parentheses: MP DEI UI UPR UTS EWI VWI Constant 13.59 -0.13 -0.63 7.21 -5.21 4.12 (3.56) (-1.64) (-1.98) (2.59) (-1.69) (1.36) -0.13 -0.85 8.13 -5.02 5.02 6.41 14.01 (3.77) (-1.67) (-2.54) (2.86) (-1.58) (1.22) (1.85) -0.80 8.27 -5.91 -2.40 10.71 11.76 -0.12 (3.05) (-1.60) (-2.38) (2.97) (-1.88) (-0.63) (2.76) The dependent variable in each regression is stock market return. Discuss what macro factors are significant for stock market returns (5 marks) and what conclusion can be made with respect to the validity of the CAPM (5 marks). Q4. Suppose the test of APT is based on the K-factor model. The K factors are the following: growth in industrial production (MP). change in expected inflation (DEI). unexpected inflation (UI). unexpected changes in risk premiums (UPR). unexpected changes in term structure slope (UTS). Equally-weighted (EWI) and value-weighted (VWI) market indexes. Fama-MacBeth's two-stage estimation technique produces the following slope coefficients with t-statistics in parentheses: MP DEI UI UPR UTS EWI VWI Constant 13.59 -0.13 -0.63 7.21 -5.21 4.12 (3.56) (-1.64) (-1.98) (2.59) (-1.69) (1.36) -0.13 -0.85 8.13 -5.02 5.02 6.41 14.01 (3.77) (-1.67) (-2.54) (2.86) (-1.58) (1.22) (1.85) -0.80 8.27 -5.91 -2.40 10.71 11.76 -0.12 (3.05) (-1.60) (-2.38) (2.97) (-1.88) (-0.63) (2.76) The dependent variable in each regression is stock market return. Discuss what macro factors are significant for stock market returns (5 marks) and what conclusion can be made with respect to the validity of the CAPM
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